Buying a Home? Consider the Home Buyers Plan
An Important Option for Canadians Thinking of Purchasing a Home
Sep 8, 2009
The Home Buyers Plan, also sometimes referred to as the First Time Home Buyers Plan, is essentially a way for someone to borrow money from themselves. For those that meet the criteria, a withdrawal of up to $25,000.00 can be taken from an RRSP and then applied towards the down payment of a new or qualifying home. In most cases, RRSP withdrawals prior to retirement would be subject to an automatic withholding tax, but this is one of the few exceptions where funds can be taken out tax free.
Who Qualifies for the Home Buyers Plan?
Not everyone will automatically meet the criteria to participate in the plan. Some of the main qualifications include:
- Being a Canadian resident
- Being a first time home buyer, or not having owned a home (including with a spouse or common law partner) during the last 4 years OR buying or building a home for a disabled relative (meaning related by blood, marriage, common law or adoption) that better suits their needs than their current residence
- Not owing a balance on a previous Home Buyers Plan loan
In addition, the individual must be withdrawing from their own RRSP (meaning they are the annuitant of the plan) and the home must be purchased prior to October 1st of the year following the RRSP withdrawal.
Combining a Home Buyers Plan with a Spouse or Common Law Partner
If the home is being purchased with a spouse or common law partner, both parties can each withdraw up to $25,000.00 from their respective RRSPs as long as they both qualify under the applicable guidelines. This way, a total of $50,000.00 could be applied towards a down payment.
But when doing so, be sure to discuss it with a financial institution first in order to have the necessary documents completed. Simply taking the money out without first declaring it to the appropriate parties would trigger withholding taxes, which would diminish the amount of money left available and defeat the purpose of the HBP.
Home Buyers Plan Withdrawals Must Be Repaid
When withdrawing from an RRSP through the Home Buyers Plan the funds are essentially treated as a zero interest loan, meaning that the amount withdrawn must be repaid over time. At least 1/15 of the balance must be repaid each year over the next 15 years.
The repayment process must begin in the second year after the funds were taken out and failure to do so would result in the funds becoming subject to income tax. It should also be noted that since these payments are viewed as repayment of a loan, they are not considered new contributions and are therefore not tax deductible.
Disadvantages of the Home Buyers Plan
One disadvantage that is often overlooked is the loss of earning potential in the RRSP. Since the balance of the savings plan would have now been reduced, the funds remaining may not grow as quickly. However, many would argue that the appreciation in value of a newly purchased home may outweigh any loss over time.
Anyone considering participating in the Home Buyers Plan, or seeking further information, should first consult with their Investment Advisor, Certified Financial Planner, or a qualified representative at their financial institution.
 |
